Neoclassical economists don’t understand neoclassical economics

That tran­scen­den­tal truth occurred to me while writ­ing the sec­ond edi­tion of Debunk­ing Economics–which will be pub­lished in Sep­tem­ber. In this video, I point out the most egre­gious instance of this, the “Son­nen­schein-Man­tel-Debreu” (SMD) con­di­tions. This refers to research by lead­ing neo­clas­si­cal econ­o­mists on whether the so-called “Law of Demand” that can be proven for an indi­vid­u­al’s demand curve applies to a mar­ket demand curve.

The “Law of Demand” is the propo­si­tion that, if a com­mod­i­ty’s price falls, the demand for it will rise. That sounds like a rea­son­able state­ment at first glance–and it will often be true in the real world. But it is an arti­cle of faith for econ­o­mists that this is always true.

Iron­i­cal­ly, neo­clas­si­cal econ­o­mists proved that this is in gen­er­al not true. Even when you are work­ing with indi­vid­u­als who all indi­vid­u­al­ly have what econ­o­mists call “well behaved” pref­er­ences, and for whom indi­vid­ual demand curves can be derived that obey the “Law of Demand”, the mar­ket demand derived by sum­ming these indi­vid­ual demands can have any shape at all.

If neo­clas­si­cal econ­o­mists took this neo­clas­si­cal result seri­ous­ly, then they would not draw “down­ward slop­ing mar­ket demand curves” in microeconomics–they would instead draw squig­gly lines–and they would­n’t use equi­lib­ri­um “sup­ply and demand” analy­sis. But not only do they do that, they also mod­el the entire econ­o­my as a sin­gle indi­vid­ual in what they call “Dynam­ic Sto­chas­tic Gen­er­al Equi­lib­ri­um” mod­els.

These absurd mod­els were what led to them believ­ing that the econ­o­my was in great shape, just before it col­lapsed into the Great Reces­sion.

I cov­er this issue at great length in Debunk­ing Eco­nom­ics II. In this video pre­sen­ta­tion, I give an overview of the SMD con­di­tions. At one point, you’ll hear me take a straw poll of how many peo­ple in the room knew of these con­di­tions: only two did out of about 60. This was a bril­liant illus­tra­tion of my basic point, that neo­clas­si­cal econ­o­mists don’t under­stand their own the­o­ry.

About Steve Keen

I am Professor of Economics and Head of Economics, History and Politics at Kingston University London, and a long time critic of conventional economic thought. As well as attacking mainstream thought in Debunking Economics, I am also developing an alternative dynamic approach to economic modelling. The key issue I am tackling here is the prospect for a debt-deflation on the back of the enormous private debts accumulated globally, and our very low rate of inflation.

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Debunking Economics II

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